As discussed in a recent post (here), in a May 8, 2014 decision the Delaware Supreme Court upheld the facially validity of a nonstock corporation’s bylaw provision shifting attorneys’ fees and costs to unsuccessful plaintiffs in intra-corporate litigation. Because the court’s holding seemed to be equally applicable to stock corporations as well as to nonstock corporations, the decision appeared to open the way for all Delaware corporations to adopt fee-shifting bylaws. The possibility that companies might be able to shift litigation costs to unsuccessful shareholder claimants potentially could have transformed shareholder litigation.
However, as discussed in a May 23, 2014 post on Francis Pileggi’s Delaware Corporate and Commercial Litigation Blog (here), a legal committee in Delaware has now proposed a change to the Delaware General Corporation Law that would limit the impact of the Delaware Supreme Court’s opinion to nonstock corporations and specifically limit stock corporations’ ability to use fee-shifting bylaws.
On May 22, 2014, the Delaware Corporate Law Council proposed an amendment to the DCGL that according to the amendment’s synopsis is “intended to limit the applicability of [the Delaware Supreme Court decision in ATP Tours, Inc. v. Deutscher Tennis Bund] to non-stock corporations, and to make clear that such liability may not be imposed on holders of stock in stock corporations.”
As reflected in a May 22, 2014 Law 360 article entitled “Del. Attys Push to Shield Stock Cos. From Fee-Shifting Ruling” (here), there was a great deal of concern in the wake of the Delaware Supreme Cour decision about the possibility that stock corporations might adopt fee-shifting bylaws. The Law 360 article quotes the head of the Corporation Law Section of the Delaware Bar as saying that the adoption of fee-shifting bylaw provisions “could drastically reduce the ability of stockholders to bring even meritorious claims,” adding that “while many believe there is more shareholder litigation than is desirable or constructive, a measure that potentially eliminates all such litigation could create serious concerns for the stockholders of Delaware corporations.”
As Pileggi noted in his recent blog post, the widespread adoption of fee-shifting bylaws “would discourage inappropriately the function of meritorious stockholder suits as the only means to hold fiduciaries accountable for fulfilling their fiduciary duties.”
According to Pileggi, the proposed legislative revision is expected to be presented to the Delaware General Assembly for passage prior to the end of the current legislative session on June 30, 2014, with a proposed effective date of August 1, 2014.
In a May 23, 2014 New York Times article (here), Ohio State Law Professor Steven Davidoff noted the “hysteria” that had followed in wake of the Delaware Supreme Court’s ruling. He also noted that some prominent attorneys were already publicly advocating that Delaware corporations adopt a fee-shifting bylaw. However, while there may have been a sense that companies might rush to adopt the kinds of bylaw provisions, Davidoff expressed his view that this was “highly unlikely to be the case.”
Davidoff suggested that “most companies” would hesitate to adopt these kinds of provisions “because of the questionable legality of such a provisions and the threat of shareholder opposition.” Davidoff noted that the Delaware Supreme Court’s decision did not state that it was applicable to stock corporations, but it did state that whether or not a fee-shifting by law is enforceable “depends on the manner in which it was adopted and the circumstances in which it was invoked.” He added that “whether the Delaware courts would enforce a bylaw that could effectively end most shareholder litigation at public companies is questionable. Such a decision would not only put many of its lawyers out of jobs but impair Delaware’s ability to rule on cases.”
Davidoff also noted that for companies that might try to adopt these provisions, the market reaction would “likely be furious.” He speculated that institutional investors and proxy advisory firms would lkely try to push out directors who voted to adopt a fee-shifting bylaw. Davidoff also noted that the provisions would not in any event have been applicable to federal securities litigation, given the views of the courts and of the SEC that restricting a person’s right to sue for securities fraud is illegal.
In the end, as Davidoff notes, the “life of the fee-shifting bylaw may be quite short.” I suspect that the speed with which the proposed legislative revision has been put forward has a lot to do with the point Davidoff makes that the widespread adoption of fee-shifting bylaws would put many of Delaware’s lawyers out of jobs.
The Two Professors Behind the Supreme Court’s Reconsideration of Fraud on the Market: At some point in the next few weeks, the Supreme Court will release its long-awaited decision in the Halliburton case, in which the Court is reconsidering the Fraud on the Market theory. Readers who like me are awaiting the Court’s decision with interest will want to read a very interesting May 23, 2014 Reuters article entitled “Behind Major U.S. Case Against Shareholder Suits, A Tale of Two Professors” (here). In the article, Frankel tells the story of how the initiative and intellectual work of two law school professors – Stanford Law Professor Joseph Grundfest and Michigan Law Professor Adam Pritchard – fueled the effort to have the Court reconsider the Fraud on the Market theory. Ultimately the two professors’ work led them to propose different analyses that were presented to the Court in two different amicus briefs.
At least based on the record at oral argument, Pritchard’s “price impact” approach seems to have garnered the most attention from the Court. But as discussed in Frankel’s article, it remains to be seen which of the various theories proposed will prevail. Indeed, as the article notes, another group of two dozen law professors filed an amicus brief urging the Court to uphold the Fraud on the Market theory. At some point in the next few weeks, we will find out which view has carried the day